Citation: Revenue Ruling 2014-2. 

Background: In 2012, the US government and 49 states reached a settlement with five major bank mortgage servicers to place $1.5 billion in a fund in order to pay out settlements to homeowners who had lost homes to foreclosure where improper banking practices had taken place.

Summary: The IRS has determined that the recipients of these payments should treat them as amounts received on the deemed sale of the residence.  This will require amending the return where the foreclosure was originally reported.

Note: Many times, such deemed sales result in no tax assessment due to the Code Section 121 gain exclusion on the sale of a principal residence.  If you have received such a settlement, contact us for proper reporting and possible amendment of your prior return.